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Kellogg on Biotech

Examining an Innovative Financing Alternative for Mid-Stage Biotech

Yuti Dalal KSM '07 and Scott Orn KSM '07,

As pharmaceutical companies struggle with declining new product yields for a host of reasons, Biotechnology companies have become the major innovation drivers in the drug development industry. Large, profitable Biotechs can fund their own research and development and are well positioned to maintain their new product development pace. At the same time, startups can attract funding because they are founded on the most exciting new technologies and venture investors are willing to invest multiple times and be patient with the companies because the low valuation they are investing at means the returns will still be strong if the company makes significant progress. In between these two groups lie the Mid-Stage Biotechnology firms, which lack the support of venture investors because they are trying to exit the investment, yet don’t have the profit streams to sustain investment. This paper evaluates an innovative financing alternative for these companies and it is our belief that such a model will become an important source of capital for many Mid-Stage Biotechs in the coming years.

©2007 Kellogg School of Management, Northwestern University